New Growth Theory, Globalization, and the Economic Prosperity of U.S. Cities Barry Bluestone Dean, School of Social Science, Urban Affairs, and Public Policy Northeastern University Prepared for the Institute for Local Governance and Regional Growth University of Buffalo (SUNY) February 13, 2008

What is Responsible for the Economic Success of U.S. Cities  Key Factors Physical Capital Technology Human Capital Transportation & Communication Revolution Globalization  Neoclassical Growth Theory vs. New Growth Theory

Changing Fortunes of U.S. Cities  Twenty (20) Metro Areas under study  Measure of Metro Prosperity: Median Household Income  Compare 1969 and 2005 data (in 2005 dollars)

Austin Tucson Tacoma St. Louis Hartford Raleigh Buffalo Map 1

Most Prosperous Metro Areas: 1969  #1 Detroit, Michigan  #2 Hartford, Connecticut  #3 Chicago, Illinois  #4 Milwaukee, Wisconsin  #5 New York, New York

Least Prosperous Metro Areas: 1969  #1 Austin, Texas  #2 Raleigh-Durham,Chapel Hill, North Carolina  #3 Jacksonville, Florida  #4 Tucson, Arizona  #5 Phoenix, Arizona

Largest Percentage Change in Median Household Income ( ) (in 2005 Dollars)  #1 Austin, Texas (+84%)  #2 Raleigh, North Carolina (+57%)  #3 San Francisco, California (+40%)  #4 Jacksonville, Florida (+34%)  #5 Boston, Massachusetts (+32%)

Smallest Percentage Change in Median Household Income ( ) (in 2005 Dollars)  #1 Buffalo, New York (-10%)  #2 Detroit, Michigan (- 7%)  #3 Milwaukee, Wisconsin (-7%)  #4 Chicago, Illinois (+5%)  #5 St. Louis, Missouri (+6%)

Prospering Metro Areas: 2005  #1 San Francisco, California  (Up from #10)  #2 Boston, Massachusetts  (Up from #8)  #9 Raleigh, North Carolina  (Up from #19)  #12 Austin, Texas  (Up from #20)

Declining Metro Areas: 2005  #20 Buffalo, New York  (Down from #9)  #17 Milwaukee, Wisconsin  (Down from #4)  #11 Detroit, Michigan  (Down from #1)

Neoclassical Growth Theory  Robert Solow: Capital Formation and Technological Change responsible for productivity growth  Technological Progress: “Advances in Knowledge”  But technology is a “black box”: impact measured as a residual

Neoclassical Theory  Dale Jorgenson: Growth in capital input (tangible assets like factories, machinery) is the most important source of economic growth Growth in labor input is the next most important source of economic growth Technological progress is the least important Law of Diminishing Returns dominates

New Growth Theory  Paul Romer, Richard Nelson, Sidney Winter  Technological Progress is at the center of economic growth

New Growth Theory – 4 Premises  Technological change provides the incentive for capital investment  Technological change is subject to various complementarities and feed-back loops  Technological change occurs as a result of intentional actions responding to profit incentives  Technology innovation provides increasing returns to scale

Evidence for New Growth Theory  Great Britain vs. U.S. ( ) In 1870, U.S. per capita income only ¾ of Great Britain In both countries, education per worker increased about the same and savings rates were comparable But by 1929, U.S. income levels were 30% higher than in Great Britain Why?

U.S. vs. U.K. “Investments”  British investors took their saving and invested abroad  U.S. became technology innovator with Henry Ford, Thomas Edison, the Wright Brothers … and Americans invested at home  By the 1920s, these technological advances provided a booming economy in the U.S.

Decline in Transportation and Communication Costs  Jumbo jet, supertanker, the container ship reduced cost of transportation dramatically  Satellites, high-speed internet, fiber optics, teleconferencing, mobile phones reduced the cost of communications dramatically  The result: Thomas Friedman’s “Flat World” – Globalization of Production

The Key to 21 st Century Prosperity?  Need to be a leader in technological innovation in order to survive and prosper in a global economy where workers and goods can move nearly at the speed of sound …. and information moves nearly at the speed of light.

Prosperous Cities  Technology Leaders in the U.S.: Boston, Massachusetts Austin, Texas Raleigh-Durham-Chapel Hill, North Carolina San Francisco, California Jacksonville, Florida Atlanta, Georgia Chicago, Illinois  Cities with a concentration of universities and medical centers  Cities with powerful international & domestic transportation hubs

The 21 st Century City  Centers for Business Services Face-to-face contact opportunities supplemented by high-speed communications attract business  Centers for Consumption Cities that are good places to live with lots of cultural amenities and recreational opportunities attract workers

The “Eco-System” for Urban Prosperity  Incubators of innovation and technology  Attractive locations for the “creative class” of scientists, engineers, architects & designers, writers, artists, musicians, and alike  Transportation and communication hubs

A Taxonomy of 21 st Century Cities  Innovation Centers Austin, Boston, San Diego, Seattle, Raleigh, Washington, D.C.  Finance Centers New York, Chicago; Charlotte, North Carolina; San Francisco  Transportation Hubs New York; Chicago; Denver; Atlanta; Memphis, Tennessee; Louisville, Kentucky

A Taxonomy, con’t  Cultural/Tourism/Recreation Centers Las Vegas, Nevada; Orlando, Florida; Philadelphia, Pennsylvania  New Manufacturing Centers Evansville, Indiana (Toyota); Greensville, South Carolina (BMW; Michelin)  Natural Resource Centers Aspen, Colorado (Skiing); Tampa, Florida (Beaches)  Retirement Centers Phoenix, Arizona; San Diego, California; Miami, Florida

A Note of Caution: Cost of Living  Those metro areas that have attracted creative industries and creative workers are now in danger of “pricing themselves out of the market”  The high cost of living in many of these cities (Boston, San Francisco, San Jose) is beginning to discourage working families and businesses from settling in these regions

CURP Study of Housing, Employment and Population  Metro areas with highest cost of living are suffering slow employment growth or outright job loss  Metro areas with the highest cost of living are suffering net out-migration of domestic population  Paradox: The shortage of housing supply can lead to a future sharp decline in housing prices … as jobs and workers leave the state

A Tale of Two Cities Basic Budget 2 Parents, 2 Children Boston Monthly Housing$1,266 Monthly Food$ 587 Monthly Child Care$1,298 Monthly Transportation$ 321 Monthly Health Care$ 592 Monthly Other Necessity$ 500 Monthly Taxes$ 824 Monthly Total$5,388 Annual Total $64,656 Raleigh-Durham- Chapel Hill Monthly Housing$ 779 Monthly Food$ 587 Monthly Child Care$ 866 Monthly Transportation$ 358 Monthly Health Care$ 368 Monthly Other Necessity$ 369 Monthly Taxes$ 350 Monthly Total$3,677 Annual Total $ 44,124 A Tale of Two Cities Source: Economic Policy Institute, “Family Budget Calculator, 2005”

A Tale of Two Cities Basic Budget 2 Parents, 2 Children Boston Monthly Housing$1,266 Monthly Food$ 587 Monthly Child Care$1,298 Monthly Transportation$ 321 Monthly Health Care$ 592 Monthly Other Necessity$ 500 Monthly Taxes$ 824 Monthly Total$5,388 Annual Total $64,656 Buffalo-Niagara Monthly Housing$ 648 Monthly Food$ 587 Monthly Child Care$1,195 Monthly Transportation$ 358 Monthly Health Care$ 514 Monthly Other Necessity$ 333 Monthly Taxes$ 326 Monthly Total$3,961 Annual Total $ 47,532 A Tale of Two Cities Source: Economic Policy Institute, “Family Budget Calculator, 2005”

Cost of Living – 4-Person Family  #1 Boston  #2 Washington, D.C.  #3 Nassau-Suffolk Country, NY  #4 Stamford-Norwalk, CT  #33 Buffalo-Niagara, NY  #71 Raleigh-Durham, NC  #127 Detroit, MI  #159 Milwaukee, WI

Low PriceHigh Price Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics Universe: 245 U.S. Metro Areas 0.95% 2.91% 2.29% 0.86% 1.53% 0.68% -0.68% 0.12% -0.62% 1.49%

Boston MSA (-4.9%) Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics Universe: 245 U.S. Metro Areas

Monthly Housing Cost Employment Change (%) ( ) Boston MSA %∆Emp( ) = Housing Cost (4.07) E-007 Housing Cost SQ (4.04) N = 245 Adj. R Square =.056

Low CostHigh Cost Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of Labor Statistics -0.21% 0.93% -0.02% 0.84% 1.06% 0.50% 1.09% 1.98% 0.62% 2.53% Universe: 245 U.S. Metro Areas

Boston MSA (-5.2%) Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of the Census Universe: 304 U.S. Metro Areas

Internal Migration (% Change) Monthly Housing Cost Boston MSA %∆Internal Migration = Housing Costs (7.03) E-007 Housing Costs SQ (7.39) N = 304 Adj. R Square =.153

Internal Migration (% Change) Monthly Housing Cost Boston MSA %∆Internal Migration = Housing Costs (7.03) E-007 Housing Costs SQ (7.39) N = 304 Adj. R Square =.153 San Francisco Stamford-Norwalk San Jose Boston Oakland Nassau-Suffolk

-2.12% 0.16% 1.54% 1.40% 2.19% 1.04% 0.60% 0.41% 0.19% 0.39% Economic Policy Institute, “Family Budget Calculator, 2005”; U.S. Bureau of the Census Universe: 304 U.S. Metro Areas Boston

Conclusion  A new hierarchy of metro areas is arising as a result of technological innovation and globalization  Urban prosperity depends to a great extent on being a leader in technology and a transportation hub  But, those cities where the cost of living rises sharply are in danger of pricing themselves out of the market for new firms and working families